How Effective Has Monetary Policy Been?

ST. LOUIS — Central banks that have a specific, numeric target for inflation appear to have a good record of hitting those targets, but an analysis from the Federal Reserve Bank of St. Louis suggests that such targets may not be a prerequisite for achieving low and stable inflation.

The analysis was conducted by Marcela M. Williams, a senior research associate, and Robert H. Rasche, a senior vice president and director of research at the Federal Reserve Bank of St. Louis. Their research appears in the September/October issue of Review, the Reserve Bank's bimonthly journal of economic and business issues. The publication is also available online at the St. Louis Fed's web site: https://research.stlouisfed.org/publications/review.

Williams and Rasche looked at 23 inflation-targeting countries and measured the moving average of their inflation rates. Generally speaking, they found these countries have been quite successful at keeping their long-term inflation rates within their target ranges.

The most successful in meeting their targets are New Zealand, Norway, Switzerland, Thailand and the United Kingdom, which have all maintained an average inflation rate well within their target ranges, even before those ranges were explicitly defined. The exceptions are Brazil, Mexico and the Philippines, while some countries, such as Chile, Colombia and Hungary have been able to bring their inflation rates down over time.

To assess the disposition on the subject by members of the Federal Open Market Committee (FOMC), Williams and Rasche compiled transcripts and public statements of various Fed officials and FOMC members for the past decade or so.

Although the Fed does not set an explicit inflation target, some Fed officials have publicly stated their preference for doing so, including Governor Ben Bernanke, Dallas Fed President Jeffrey Lacker, San Francisco Fed President Janet Yellen and Philadelphia Fed President Anthony Santomero. Williams and Rasche describe St. Louis Fed President William Poole's statements regarding explicit inflation targets as "ambivalent."

Governor Donald Kohn, among others, has expressed opposition to an inflation target for the central bank.

Williams and Rasche emphasized that that the Fed's success over the past two decades in stabilizing the inflation rate without using explicit inflation targets would seem to question the marginal benefit of targeting, at least in the United States.

In addition, they surveyed historical research and commentaries to examine why evidence of the effects of monetary policy on output stabilization are so elusive. While a number of studies show the contractionary effects of monetary policy, results from econometric models often conflict with historical evidence, and economists debate how to reconcile those discrepancies.

Finally, Williams and Rasche concluded that the case for consistently effective short-run monetary stabilization policies is problematic because there are just too much uncertainties in the environment in which central banks operate.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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